ECB & SPAIN: Stand by for the big-guns barrage


Draghi….cometh the hour….

Swiss credit source tells The Slog: “We’re talking very, very big here: this is going to dwarf anything done for Greece, and it is going to make the bank 200% responsible for stopping the collapse”

The regions of Spain don’t come much more affluent than Catalonia. So the depth of Spain’s problem was made brutally clear this morning when the Catalans officially requested  the full works – total bailout – hoping to apply for a cool  €5.23 billion from Madrid. I understand that Mario Draghi knew about this last Friday, but it isn’t the only thing on his radar.

As The Slog posted two days back, Draghi has been playing a dangerous game of poker with Madrid; it now looks as if – unless he does something big, and soon – his bluff will be called bigtime. So much  money was withdrawn from Spanish banks last month, the total overtook anything the EU has seen since Draghi’s ECB began collecting the data some fifteen years ago – before EMU was even a reality.

Although the markets seemed curiously calm in the light of these developments, my good source in the Madrid money markets was sanguine on the subject:

“Our view here is that either Draghi goes nap on solving the problem now, or the euro is history,” he told me, “so there’s no point in panicking just yet. If, however, he hasn’t moved by say Friday, well, people will get edgy. If he’d gone to Jackson Hole, we’d all have gotten very edgy.”

In fact, it turns out that the entire executive board of the ECB has cried off the Wyoming jolly. So something is very clearly afoot.

Eight days ago, Spain’s Minister for the Economy Luis de Guindos told news agency EFE that the ECB “must deploy unlimited bond buying” before too long. It’s pretty obvious that Supermario did that earlier today as the bond yields fell at the latest Spanish auction. But the expectation of serious firepower being applied to the debt issue is the overriding reason why the Central Bank’s Chairman personally ordered all exec members to stay in Europe “for at least the next ten days”.

A Swiss-based bank credit specialist I’ve known for some time now insists that it is bank viability, not bonds, that’s kept the EU’s central bankers chained to their Frankfurt desks.

“I think too many observers are underplaying the [Spanish] banking liquidity thing,” he said last night, “Draghi knows what to do and how to do it, but I think only in the last few days has he grasped the size and the inevitability. We’re talking very, very big here: this is going to dwarf anything done for Greece, and it is going to make the bank 200% responsible for stopping the collapse”.

My own view – having spoken to a range of commentators and traders in recent days – is that there comes a point at which bank liquidity and sovereign debt are inextricably linked – and I sense that the Calatonia request screams out that this point has been reached. Catalans produce 20% of the Spanish gdp, but a spokesman from the region said categorically that they “would not accept any political conditions for the aid” –  a classic anti-Madrid emotion based in history, but also I suspect a swipe at the ECB in general, and Draghi’s poker face in recent times.

Too many regional and banking dominoes falling too quickly will make today’s bond purchases irrelevant. From here on, it’s about an irreversible decision from the Central Bank. And it’s abou the euro.